SUSTAINABLE DEVELOPMENT - NECESSARY STEPS

Although sustainable development is still more a vision than a strategy, the concept may become the cutting edge of social and economic reform. What it may represent is the first step towards global revisions in fundamental regulatory and economic policies, in addition to bridging the gap between rich and poor nations.

The steps involved towards achieving this level of global cooperation would prove volatile in the first stages of the its development. Industrial nations would have to shift from resource-intensive production systems and lifestyles to ones that consume vastly fewer resources and dramatically cut pollution. Developing nations would have to practice less destructive agriculture, industrialize with unprecedented care, and cut birth rates, which all implies improving women's rights. Rich nations would have to give billions in aid, while their industries shared the latest technology. Taking the evolutionary steps toward sustainable development will not come easily. Already, critics in the United States claim the concept will boost regulation and government spending. Separately, Americans do not like changes in lifestyles. As John Sterman of MIT points out, "Sustainable development questions the purpose of society, the relationships between humans and nature, and demands social justice and equity." Which may cause controversial implications for sustainable development....

DEBT

Crushing debt exacerbates matters. As of 1989, developing nations owed $1.2 trillion, ($1,200,000,000,000) or 44 percent of their collective GNP. To pay off these borrowings, these countries have exported about $50 billion in resources annually since 1983. This sell-off promises to be increasingly devastating, since farming, fishing, forestry, and mining account for more than two-thirds of employment and 50 percent of export earnings of these nations. Of 33 countries that exported tropical timber in 1985, some 23 are likely to run out within a decade. Yet in that time frame, developing countries will need to create 1 billion new jobs. If they industrialize without clean technology, as China, Brazil, and India are doing, they'll greatly boost global pollution and resource destruction.

However, commercial logging, cattle ranching, fuelwood gathering, and infrastructure development are all driven by economical, social, and political forces, which manifest themselves through market and policy failures, population pressures and poverty.

MARKET AND POLICY FAILURES

Market and policy failure contribute powerful incentives to exploit the forests. Market failures include: (1) absence of clearly defined property rights on forest resources, both within a particular time period and between the present and the future; (2) the conflict between the time horizon of present individuals and society's need to protect the forests for future generations, which creates a bias in favor of exploiting forests now; (3) the difficulty of valuing joint products and non-market environmental services (eg, biodiversity); (4) the existence of externalities in the divergence between private and social costs. (Sharma, et al, 1992)

TROPICAL FORESTS

A large challenge will be conserving the tropical forests, which house 50 percent of the world's species and soak up the greenhouse gas carbon dioxide (CO2). They are being destroyed at the rate of 42.5 million acres a year, up 50 percent since the late 1970s. As a result, some biologists estimate, up to 20 percent of the world's species will disappear within 50 years with undetermined effects on the environment. Already the atmospheric CO2 has risen 20 percent in a century.

Economic and policy changes alone won't turn the tide in developing nations. Just as crucial would be the massive aid and debt relief from industrial countries, plus investment by multinational companies. Aid should be redirected. Instead of dams and roads, aid should largely fund soil conservation, reforestation, family planning, improved agriculture, technology transfer, and poverty reduction. Debt-for-nature swaps could become major incentives.

DEBT-FOR-NATURE SWAPS

Debt-for-nature swaps were intended to protect wildlife and promote conservation in developing countries which are burdened with debt and cannot afford to spend money to protect the environment. In recent years, the concept has been promoted by international conservation groups. It has been considered a method of solving two problems at once.

For creditors, which are mostly commercial banks in industrialized countries, such swaps would provide an opportunity to dispose of non-performing loans and earn recognition for contributing to environmental protection. Developing countries are thought to have as much as $500 billion in foreign commercial debts that could be swapped for nature preserves. (Inose, 1992)

DEBT-FOR-NATURE SWAPS - HOW THEY WORK

The way the swap generally works is that a creditor donates its claim against a country to an environmental organization which forgives the debt in exchange for a commitment to establish a nature preserve off-limits to development. As of May 1992, 23 cases of such swaps have been reported.

The involvement of the international corporate community may prove a watershed, reflecting a convergence of corporate sensitivity to customers' environmental concerns with the interest of the bank and the US government in resolving the international debt crisis.

DEBT-FOR-NATURE SWAPS - MORE THAN INNOVATIVE FINANCING

The idea of debt-for-nature swaps is credited to Thomas Lovejoy in 1984, an ecologist at the Smithsonian Institution.

In the first swap, in 1987, Conservation International, a non- profit group, paid $100,000 to Citicorp for an uncollectible $650,000 owed to Citicorp by Bolivia. Conservation International then agreed to forgive the entire debt in return for Bolivia's promise to protect four million acres of tropical forests. (New York Times, 1991)

BOLIVIA

In another example, the World Wildlife Fund and the Nature Conservancy, worked with JP Morgan to complete what is believed to be the world's largest debt-for-nature swap. The swap involves $11.5 million of Morgan's Bolivian debt, which will be converted at 24 percent of nominal value, which would provide the conservation groups with some $2.8 million to further their efforts to protect the environment in Bolivia. The Bolivian government will commit $2.8 million in local currency to support the efforts of the Fundacion Amigos de la Naturealeza, a private conservation group, and its two American partners, the Nature Conservancy and the World Wildlife Fund. (Morgan, 1992)

The Nature Conservancy plans to train and pay the salaries of workers in two national parks, home to a variety of rare animal species. The World Wildlife Fund will organize workshops in forestry management and provide direct support for forest preservation in ecologically stressed headwaters in the Amazon River.

The debt exchange reflects Bolivia's ongoing efforts to drastically pare down its remaining commercial debt of some $185 million while complementing the country's conservation efforts. For JP Morgan, which has completely written down its LDC debt, the donation represents "a unique opportunity to provide funding for environmental and wildlife projects," according to bank chairman Dennis Weatherstone.

The Morgan deal fits into the latest debt restructuring package offered by Bolivia to the banks that still hold its debt. This group includes Citibank, Morgan Guaranty Trust, Scotiabank and Bank of Montreal. One of the options allows the banks to exchange debt for environmental or other worthy projects at 16 percent of face value to which a 50 percent premium is added when the project is satisfactorily completed. The two other options are more conventional:

- The Bolivian government will issue 30-year bonds at 100 percent of nominal value compounded in US dollars and guaranteed to maturity. The terms for the recuperation of these have not been worked out, but it has been decided that returns in some way will be linked to fluctuations in the world market price of Bolivian tin exports. (Lagniappe Letter, 1992)

GUATEMALA

On May 22, 1992 Guatemala signed a deal with Conservation International, the country's first debt-for-nature swap. In the deal, US companies donated $1.3 million in bonds to Conservation International, (Guatemala's external debt totals US$3 billion) which exchanged them for government certificates-of-deposit in local (Guatemalan) currency. Interest on those certificates will be used to start the project, as will the principal when the certificates come due, some in six months and some in one year.

Guatemala's legislature voted in January of 1990 to set aside 3.5 million acres in the department of the Peten as the Maya Biosphere Reserve. The money from the swap will be used to help finance the protection of the recently created government reserve.

The Peten is a lowland, heavily forested region of 3.6 million hectares, occupying about one-third of Guatemala. A rapid influx of people to the region has resulted in increased deforestation in the region. Deforestation rates rose from an average 287.7 square kilometers per year between 1968 and 1978 to an average 426.1 square kilometers per year between 1978 and 1988. At the current rate of deforestation, the Peten rain forest, which supports a wealth of tropical wildlife, will be destroyed in 25 years, according to environmentalists in Guatemala. (International Environment Daily, 1992)

The project to protect the area was supposed to be partially administered by the Guatemalan government, but it has run into problems because of a lack of funding and human resources.

Both the ecology and economic productivity of the Peten's forest reserves are under threat. Over the past 20 years, its population has nearly quintupled, from about 65,000 in 1973 to as many as 300,000 today. In the meantime, there has been a depletion of forest resources through over-harvesting and slash-and-burn agriculture. (Inter Press Service, 1992)

The project's goal, dubbed Pro-Peten, is to balance income- generating activities with conservation so that the forest's resources are not taxed beyond their capacity. Through Pro-Peten, Conservation International will provide aid to Guatemala's National Council for Protected Areas (CONAP), local communities, and individual harvesters in the Maya biosphere reserve. Conservation International plans to specifically focus on developing a long-term plan for resource harvesting in the area and on working with harvesters to promote ecologically sound extractive techniques.

The aid will also include strengthening the channels of distribution for the products harvested in the forests to world markets, and increasing the variety of marketable forest products from the Peten. Guatemala's rural population has a tradition of harvesting non-timber forest products. Conservation International's Guatemala director says "Families can earn up to three times the normal daily wage by harvesting forest products -- two or three times what they would get from planting corn or raising cattle."

DEBT-FOR-NATURE - BRAZIL

Brazil contains the world's largest tropical rain forest, its biggest river system and its richest array of plant and animal life. With the world's 10th largest economy, the country is guilty of all the pollution, deforestation, encroachment on native populations and grandiose development projects that typify the global environmental crisis.

COLLOR - BRAZIL'S GREEN PRESIDENT?

For years Brazilian authorities viewed the ecological concerns with suspicion and scorn, as if they were part of an international plot to thwart the country's development. In March 1990, Fernando Collor de Mello was inaugurated as Brazil's first green president. Collor named Jose Lutzenburger, one of the world's foremost champions of rain-forest preservation, head of a new environment secretariat. The President also vowed to reverse decades of untrammeled development that destroyed 415,000 square kilometers -- an area the size of Iraq -- of the Amazon rain forest. He blew up airstrips used by gold miners who had invaded Yanomami Indian lands in the country's far north and made recognition of native territorial claims a top priority. The most viable symbol of environmental progress could be seen by satellite: the rate of destruction of the rain forest dropped 27 percent from 1989 to 1990, and 20 percent in 1991. (Serril, 1992)

Collor proclaimed a "change in mentality" in Brazil, and his early measures earned international applause. But now he is under the same fire from environmental critics as his predecessors. "There has been no forward movement," say Fabio Feldmann, the leading environmentalist in Brazil's Congress. "On the contrary, what we have seen is total paralysis." (Serril, 1992)

BEHIND THE SCENES

Collor's government stands accused of failing to fulfill some of its most important promises. Many conservation areas and national parks exist only on paper. Cattle ranchers, farmers and miners continue to burn, bulldoze and poison the forests. Brazilian environmental agencies still lack the staff and equipment they need to protect endangered flora and fauna. Foreign funds dedicated to Brazilian conservation efforts languish unused because the Collor government, plagued by corruption and staff turnover, has failed to develop projects that would make use of the money.

Even the slowdown in Amazon destruction, critics say, owes less to Collor's policies than to a sagging economy. Nobody has any money to cut the forest down.

Activists put much of the blame for Brazil's lack of progress on Lutzenburger, the brilliant but eccentric and irascible Environment Secretary.

Branded a disaster for his lack of administrative and political skills, he was abruptly fired by Collor in March after Lutzenberger urged World Bank officials not to lend Brazil money to clean up its environment because the main government agency that would handle the funds was a "nest of corruption."

Collor argues that "we cannot discuss the environment issue without taking into account the situation of poverty and misery in which three-quarters of humanity lives." Including the 70 percent of Brazil's 146 million people who barely earn enough to feed themselves. Even environmentalists concede, "Brazil is very important to the international community because of its biological diversity, but within the country, other issues are much more important. It's hard to relate to sustainable development when you also have problems of equity and social justice."

PROTECTING THE ENVIRONMENT IN BRAZIL

Brazil has so far declined to sign any separate U.N. agreement on protecting its environment. The government is also reluctant to join what is describes as "schemes to transform forests in developing countries into preserved areas in return for compensation from the industrialized world." This is an apparent reference to suggestions that Brazil should receive relief from its huge foreign debt in return for protecting the Amazon Basin. While Collor in principle has endorsed debt-for-nature swaps for small projects, only one deal has been negotiated.

Collor's opponents charge that big business is the real force behind the government's policy. "What does sustainable development mean in the Amazon? The big polluters are hiding behind these two words." In fact, a wood-pulp producer in the Amazonian state of Para has described "sustainable development" as a plan to clear-cut 5,000 hectares (21,000 acres) of virgin tropical forest and replant the area with eucalyptus trees. (Serril, 1992)

BRAZIL'S DEBT-FOR-NATURE SWAP

In June 1992, Collor signed a plan to put a large national park under sound environmental management. Nature Conservancy, the American partner in the swap, intends to purchase $2.2 million worth of Brazil's huge $125 billion foreign debt. The $2.2 million represents the face value on the debt being acquired, but in fact Nature Conservancy buys the debt on the secondary market, where it costs them only 39 cents on the dollar. In turn, the Brazilian government will continue to pay interest on the debt. Those interest payments will go to a fund to manage a half-million acre national park in conjunction with the Brazilian environmental group and the government.

Bill Posseil, a representative of Nature Conservancy claims Brazil's forests are in danger of being degraded by soybean agriculture. Posseil acknowledges soybean agriculture as "A very important part of Brazil's economic development. But at the same time," Posseil states, "this is an important ecosystem and is the second largest eco-region in Brazil behind the Amazon. And to see it go, with its rich biological diversity and the species that are found there, that are very unique to that region, endemic species, would be a shame." But what about the local peoples who rely own soybean farming? It is easy to imagine the opposing perspective a Brazilian citizen may see. (Stamberg, 1992)

PROBLEMS WITH THE SWAP

Despite President Collor's announcement a year ago that Brazil would accept debt-for-nature proposals for up to a limit of $100 million worth of its foreign debt, the Nature Conservancy has had a hard time getting its deal approved. Many in Brazil think engaging in such an exchange passively recognizes that legitimacy of foreign debt that they consider immoral. Others oppose debt- for-nature swaps because they allege it would lead to a loss of sovereignty.

"Nobody has the illusion here that this is any serious form of debt relief. But in a country where most national parks exist in name only, it may be a way to increase the amount of lands where nature is truly protected." (Stamberg, 1992)

DEBT-FOR-NATURE SWAPS - LIMITATIONS

It is apparent that debt-for-nature swaps are capable of playing a dynamic role in the preservation of the earth's plant and animal life while helping to lift the Third World from the grasp of overbearing foreign debt. So why have so few such swaps taken place to date?

DEBTOR NATIONS

Although the deals between the banks and conservation groups are not that complicated, the difficulty lies in negotiating with the debtor country governments and local environmental groups.

From the debtor country's perspective, the list of disadvantages is lengthy:

• the potential inflationary impact of debt swaps; -the relatively high price that could be paid for the debt;
• the yielding of land to private voluntary organizations through a debt swap;
• the cost of servicing domestic bonds issued in exchange for the external debt;
• the perceived loss of sovereignty incurred if land ownership were transferred to an international private voluntary organization; and
• the potential for debt swaps to restrict profitable development activities (Institutional Investor, 1991)

FINANCIAL INSTITUTIONS

For banks, the swaps were a plus because they allowed institutions to unload high-risk loans and might cause the secondary market price of the debt to rise as some of it was retired. Some banks, however, actually donated rather than sold the debt used in swaps.

US law gives a bigger break to banks that sell their loans on the secondary market. For example, if a bank with a 34 percent tax rate donates debt with a face value of $100, the bank realizes a net tax benefit of $34 and receives no cash in hand. But if the bank sells the debt in the secondary market for $10, it nets a tax benefit of $30.60 for the $90 write-down and gets $10 cash from the sale, for a total of $40.60. Which in a broad view, translates into millions of dollars. The difference represents a major disincentive for donations.

Some suggest the financial institutions holding the foreign debt should write it off the books and take the loss, to look towards the financial opportunities which could be focused upon in the future. Banks, however, have often been reluctant to invite scrutiny from federal regulators and shareholders who may question why an institution would give away part of its holdings while continuing to claim value for the remainder. However, in the long run, it's in their (the banking industry's) interest to stabilize the economies of these countries and to respond to government statements that there should be voluntary debt reduction from the private sector. (Institutional Investor, 1991)

ENVIRONMENTAL GROUPS

The groups brokering the deals have tiny resources compared to the size of Latin America's debt burden, which proves very limiting. Some worry that environmental obligations taken on by Latin American governments could entail expanded printing of local currency and thus stimulate inflation. The Enterprise for the Americas plan, requires that governments entering into debt-for- nature deals put a portion of their environmental funds into trust accounts, with the interest being used for conservation projects, like increasing the number of forest rangers. This would avoid a sudden, heavy infusion of new currency.

INDIGENOUS PEOPLES

Another worry has been that the concerns of indigenous peoples - such as Indians who rely on rain forests to make a living - are overlooked when environmental programs are designed. But careful planning should be able to weigh those interests and avoid hardship.

ACTIVISTS

Activists from poorer nations also resent attempts by environmental groups to negotiate debt-for-nature swaps, in which foreign debt is forgiven in return for creating a natural reserve or other environmental projects. In the eyes of the Southern groups, the debt was contracted illegally and should not even be recognized. Southern activists want to discuss development and suspect that environmental reform may be just a plot to keep them down.

The Northern groups are perceived as arrogant, impatient, and irritative when someone can't speak English. Northern groups are worried about possible corruption and want some accountability for contributions, just as industrialized nations with similar concerns want to funnel their aid through existing institutions. Because of such tensions, treaty-making is proving nearly as difficult for the activists as it has been for governments.

THE RELIEF OF DEBT OR THE PRESERVATION OF NATURE?

This excerpt leads us to another question: what is or should be, the ultimate cause of debt-for-nature swaps? Debt reduction, or environmental protection? The answer, most appropriately, should be both.

Developing nations should not bear the full brunt of preserving their natural resources for the benefit of the world community. Actions are needed at a global level. Sustainable development must unfold from a philosophy to policy. Tools such as debt-for-nature swaps can represent a fundamental shift between the relations of poor and rich countries. However, industrial nations must be willing to play a key role in the assistance of the poorer nations.

Technology most become the chief engine of sustainability. Slashing the resources used and pollution emitted per unit of output -- is the way for industrial countries to curtail environmental damage. With the proper infrastructure, industrial countries could recycle more than 50 percent of their paper, glass, plastics, and metals, according to studies by UN agencies.

Along with better technology, less developed nations need a new model for growth. In the past, this has been geared toward dam and road projects, ranches and commodity agriculture, and mining -- all of which destroy ecosystems and do little to help the poor. The emphasis need to shift to creating small businesses and sustainable farming, forestry, and wildlife management.

Agenda 21, the action plan to be considered at Rio, would cost $125 billion or more a year until the turn of the century -- versus the $54 billion rich nations give in aid now. Much of that could be raised if rich countries doubled their contributions to 0.7 percent of their GNPs -- by diverting less than 3 percent of defense spending.

We must participate in a critical rethinking of what it is to "grow" and what it is to "develop." Herman Daley distinguishes growth and development in the following; "When something grows, it gets physically bigger. Development, by contrast, is the realization of potential, the evolution towards a greater, fuller or better state. So it's quantitative expansion versus qualitative improvement... Perhaps we can develop forever. But we can certainly cannot grow forever." (Suzuki 1992)

Debt-for-nature swaps are simply one of the many vehicles which will enter the global arena in our future to carry us towards sustainable development. New practices will grow and develop, new innovative and resourceful technologies will prosper in a competitive field, and the steps toward a global community practicing sustainable development will unfold a new style of living in a more harmonious relation with nature. Although debt- for-nature swaps are far from perfected, I encourage you, the reader, to consider the concept as a mean to move towards a greater end. Sustainable development may not only redefine "development," but also our sense of "prosperity."

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